Despite the best of intentions web blogging this week has been sparse, my time filled with contract negotiations and responses to solicitations. Most recently on my radar is the latest proposed DFARS rule to allow contractors to self-certify their business systems. Paul Cederwall at Pacific Northwest Government Contracting Update blog has has a lot to say about the rule that is interesting but he gets some important things wrong.
To provide a little background, a DFARS requirement that has been in place since May 18, 2011 established six business systems that must demonstrate accountability and traceability in their internal systems to ensure that there is a high degree of confidence in the integrity of the underlying systems of the contractor receiving award of a government contract. You can find the language here. Given that this is the taxpayer’s money, while there was a lot of fear and loathing on how the rule would be applied since it included some teeth–the threat of a withhold on payments–most individuals involved in acquisition reform welcomed it as a means of handling risk given that one of the elements of making an award is “responsibility.” (This is one leg of the “three-legged stool test” that must be passed prior to a contracting officer making an award, the others being responsiveness, and price and price-related factors. This last could include value determinations.)
The concept of responsibility is a loaded one, calling on the contracting officer to apply judgment, business knowledge and acumen, and analytical knowledge. The elements, from the Corporate Findlaw site has a very good summary as follows:
“the FAR requires a prospective contractor to (1) have adequate financial resources to perform the contract; (2) be able to comply with the required or proposed delivery or performance schedule; (3) have a satisfactory performance record; (4) have a satisfactory record of integrity and business ethics; (5) have the necessary organization, experience, accounting and operational controls, and technical skills; (6) have the necessary production, construction, and technical equipment and facilities; and (7) be otherwise qualified and eligible to receive an award under applicable laws and regulations.”
Our acquisition systems, especially in regard to extremely large contracts that will turn into the complex projects that I write about here, tend to be pulled in many directions. The customer, for example, wants what they need and to reduce the procurement lead time as much as possible. Those who are given oversight responsibility and concern themselves with financial accountability focus on the need for compliance and integrity in the system, and to ensure that funds are being expended for the purpose contracted and in a manner that will lead to the contractually mandated outcome. The contractors within the competitive range not only bid to win but their proposals are calibrated to take into account considerations of risk, market share and exposure, strategic positioning, and margin.
Thus, the Six Business Systems rule is a way of meeting the legal requirement of determining responsibility, which is part of the contracting officer’s charter, particularly under the real-world conditions imposed by governmental austerity. But here is the rub. When I was an active duty Navy contracting officer we had a great deal of resources at our disposal to ensure that we had done our due diligence prior to award. The military services and the Department of Defense provided auditing resources to ensure the integrity of financial systems, expose rates during the negotiating process to meet the standard of “fair and reasonable,” and to ensure contract compliance and establish reliable reporting of progress based on those audits.
But things have changed and not always for the better. During the 1980s and after technology was the first agent for change. As a matter of fact I was the second project manager of the Navy Procurement System project in San Diego during that time and so was there at the beginning. The people around me were prescient–despite the remonstrations to the contrary–that such digitization of procurement processes would result not only in improvements in the quality of information and productivity, but also reductions in workforce. The result was that the federal government lost a great deal of corporate knowledge and wisdom while attempting to weed out suspected Luddites. Hand-in-hand with this technological development came the rise of government austerity, which has become more, not less, severe over the last thirty years. Thus the public lost more corporate knowledge and wisdom in the areas most sensitive to such losses.
Over this time criticism of the procurement system has seemed like the easiest horse of convenience to beat, especially in the environment of Washington, D.C. The contracting officer pool is largely inexperienced. The most experienced, if they last, are largely overworked, which diminishes effectiveness. New hires are few and far between, especially given hiring and pay freezes. Internships and mentoring programs that used to compete with the best of private industry have largely disappeared and most training budgets are either non-existent or bare-boned. The expected procurement “scandals,” the overwhelming majority of which can be directly traced to the conditions described above as opposed to corruption, fraud, waste, or abuse, resulted.
Because of these conditions, the reaction in terms of ensuring integrity within the systems in lieu of finding scapegoats, was to first establish the Business Systems rule, which is in the best tradition of management. But, given that things became unexpectedly more austere with government shutdowns and sequestration, the agency tasked with enforcing the rule–the Defense Contract Audit Agency (DCAA)–does not have the resources to complete a full review of the systems of the significant number of contractors that provide supplies and services to the U.S. Department of Defense. Thus, the latest solution was to propose self-certification–one which was also sought by a good many companies in the industry.
There are criticisms coming from two different perspectives on the rule. The first is that self-certification is charging the fox with watching the hen house. The 2006-07 housing bubble and resulting banking crisis is an object lesson of insufficient oversight.
The other criticism comes from many in the industry that sought the change. The rub here is that teeth were imposed in the process, requiring an annual independent CPA audit. DCAA will review the results of the audit and the methodology used to make the determination of the certification. This is where I part with PNWC. The knee-jerk reaction is to question DCAA’s ability to judge whether the audit was completed properly because, after all, they were not “competent” to complete the audits to begin with. This is a tautology and not a very good one.
As a leader and manager, if I delegate a task (given that I am usually busy on more pressing issues) and put checks and balances in place in the performance of that task, there will still come the time when I want that individual (or individuals) to present me with an accounting of what they did in the performance of that task. This is called leadership and management.
The legal responsibility of DCAA in this case in their oversight role is to ensure the integrity of the contractor’s systems so that contracting officers can make awards with confidence to responsible firms. DCAA is also accountable for the judgment and process in providing that certification. One can delegate responsibility in the completion of a task but one cannot delegate accountability.
Note: Some formatting errors came out in the initial posting. Many apologies.